SBI hikes deposit rates by 0.5-1.5%

Analysts feel that the higher deposit rates may not be sustainable for over a couple of quarters as inflation is expected to moderate with supply side pressures easing.

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B. S. Srinivasalu Reddy

Mumbai

December 7, 2010

UPDATED: December 7, 2010 11:03 IST

One after the other, banks have been hiking deposit rates since last weekend, in a bid to corner most of the Rs 1.2 lakh crore of certificate of deposits (CDs) that are coming up for renewal this month. This has raised fears that the lending rates will follow the spiralling deposit rates this month or the next.

The largest bank in the country, State Bank of India (SBI), also joined the race with its latest hike in deposit rates by 0.5-1.5 per cent across maturities.

ICICI Bank (which also hiked its lending rates) and three public sector banks - Punjab National Bank, Syndicate Bank and Bank of India - have also raised their deposit rates close on the heels of the comment by the governor of the Reserve Bank of India (RBI).

Home finance major Housing Development Finance Corporation (HDFC) has also announced raising its deposit rates last week.

SBI's new rates that will be applicable from Tuesday (December 7) propose a maximum return of 8.75 per cent on eight to 10 year deposits, up by one per cent.

The maximum benefit of 1.5 per cent is available on 46-90 day deposits, which will fetch 5.5 per cent from Tuesday. Other public sector banks are expected to follow SBI in hiking rates soon.

However, analysts feel that the higher deposit rates may not be sustainable for over a couple of quarters as inflation is expected to moderate with supply side pressures easing.

The present hike in deposit rates is also termed as a temporary measure aimed at easing the present liquidity constraints from expanding further beginning December 15, the deadline for the payment of advance tax by firms.

"There are two justifications for the present round of deposit rate hikes. One, to offer inflation-positive returns in a bid to attract more funds from investors. And two, precautions taken by some banks in anticipation of further tightening of liquidity by the middle of the month," said Bhaskar Sen, chairman and managing director (CMD), United Bank of India.

"This is only a temporary phenomenon. Inflation is expected to moderate next year with the easing of supply side constraints (mainly foodgrains)," he added.

At the annual bankers' conference last week, RBI governor D. Subbarao had asked banks to hike deposit rates and lower their lending rates with a view to raise the level of savings in India and encourage investment required for double-digit growth.

However, banks seems to have turned a deaf ear to the suggestion to bring down the lending rates, as that would have constrained their net interest margins (NIMs) and affected their profitability further.

Companies have to deposit their tax liabilities up to the 15th of the last month of the quarter and for the remaining 15 days by the end of the quarter.

More than Rs 40,000 crore will go out of the banking system into the government coffers in the form of this tax.

In this context, many bankers and economists are pointing to the Centre as the main culprit for higher interest rates. The government is said have had deposits of over Rs 76,000 crore by October-end, according to RBI statistics. Banks are hoping that the government would spend at least a part of it by end-March 2011.

To a specific query, A. D. M. Chavali, general managertreasury of Bank of Baroda said, "It is a natural corollary. Lending rate hikes should follow deposit rate hikes as soon as possible."

FOR THE PEOPLE, FOR NOWAnalysts say higher deposit rates may not be sustainable for over a couple of quarters as inflation is expected to moderate

Present hike in deposit rates is termed as a temporary measure to ease the present liquidity constraints from expanding further

RBI governor D. Subbarao had asked banks to hike deposit rates and lower their lending rates to raise the level of savings in India and encourage investments

Banks however, refused to bring down the lending rates as that would hit their profitability.